Why Companies Change Exchanges

Decades ago, a seat on the New York Stock Exchange represented the pinnacle of business achievement, though to some degree this still holds true today. Being listed on the NYSE gave your company the cachet that a seat on San Francisco's Pacific Stock Exchange or the Spokane Stock Exchange just didn't offer. (Reinforcing the point, both of those exchanges are now defunct.)

We see that prestige manifest itself today - the pomp, merriment and photo opportunities that accompany the trading day's opening and closing bells. However, in today's world, where capital flows across the globe in milliseconds, is an NYSE listing still as meaningful as it used to be? If it were, would a company ever willingly leave the Big Board and go elsewhere?

RequirementsFor the most part, when a company switches exchanges, it's less an action than a reaction. Companies don't elect to leave so much as they're asked (or gently persuaded, or ordered) to. Look at the NYSE. Its requirements for joining are as stringent as ever. If you think you'd like to have your bakery or dry cleaning business listed on the exchange, you have a lot of work to do.

New entrants to the NYSE (or companies spun off from larger, existing companies) need to do an initial public offering (IPO) of at least $100 million. That's in addition to plenty of other criteria an NYSE hopeful has to meet. For instance, your company's aggregate pre-tax income for the last three years has to be at least $10 million. Or if you're lacking there, the NYSE will be happy to consider your company's application if your global market capitalization is $150 million. (Again, with plenty of other requirements to meet.) And once a company qualifies, that doesn't mean anything in and of itself. The NYSE goes to great lengths to remind everyone that meeting all its criteria is a necessary condition for being listed, not a sufficient one.

2,308 companies currently trade on the NYSE, a number that never stays constant. To cite a timely example, one of the latest victims to fall off the board is Qiao Xing Mobile, which manufactures cheap phones. Summarizing the NYSE's publicly announced reasons for its decision, Qiao Xing's CFO quit for undisclosed reasons. The NYSE asked for disclosure, and Qiao Xing was not forthcoming. The company's public accounting firm also quit, a detail that Qiao Xing also kept to itself for some reason. Qiao Xing fell from grace and made a soft landing on the over-the-counter markets, the untamed frontier of public trading, where requirements barely exist.

Changing ExchangesBut moving from the NYSE to another exchange isn't necessarily a step down. Sometimes, it makes prudent business sense. Take the case of Kraft Foods, which until last month was not merely an NYSE member but had spent the last three years at the pinnacle of the exchange: Kraft was one of the 30 components of the Dow Jones Industrial Average, which remains the definitive bellwether of the market. A $69.5 billion company, Kraft has been profitable for years and shows no signs of slowing down. So where was there to go from the NYSE?

Advantages of the NasdaqNasdaq. The former brash upstart exchange, the first to process transactions electronically, has now taken its rightful place as the NYSE's equal - and even its superior in some respects. The largest and most profitable company on Earth, Apple, trades on Nasdaq. As do Amazon, Google, Facebook and other titans of commerce too numerous to mention.

Kraft joined the party uptown for several reasons, but primarily for the effect doing so had on the company's bottom line. (Ld) Kraft had already announced that it was ready to separate into two companies - one concentrating on North American grocery brands, the other on snack foods sold across the globe. Once the split becomes official, it'll be easy for both Kraft's successor company and its designated spinoff to both be listed on Nasdaq. In addition, Nasdaq's listing fees are smaller than those of the NYSE. The few tens of thousands of dollars Kraft will save on said fees aren't necessarily enough to warrant a switch on their own, but coupled with Nasdaq's promotion and brand building, they are.

DelistingWhile every stock exchange upholds a set of standards for being listed, and will delist companies that no longer qualify for inclusion, stock exchanges don't particularly enjoy delisting stocks. After all, too much exclusion is bad for business. It sends a message that makes the exchange look like it was lax by letting certain companies join its roster in the first place. In most cases, the exchanges will do everything in their power to prevent a stock from being kicked out.

For instance, Nasdaq sets a $1 minimum price for a stock to remain listed. If a company's stock falls below that threshold - technically becoming a penny stock, with all the negative connotations that implies - the clock starts ticking. If the stock stays under the $1 barrier for a month, it's in danger of being delisted and being forced to look for a less demanding exchange on which to trade. Even then, the company will typically have six months to get its stock price over $1. Moreover, even at that point, should the stock have failed to reach $1 for 10 consecutive business days, the company can appeal its delisting. In short, to lose your privileges, you've almost have to wantto be delisted.

The Bottom LineDuring Nasdaq's nascence, the NYSE proudly kept its fees high and its barrier all but insurmountable. Burgeoning young companies (most famously Microsoft) had neither the wherewithal nor the inclination to pay gigantic fees when a suitable alternative was available. It became a win-win: Microsoft gained prominence on the Nasdaq, while the junior exchange gained credibility by having such a huge, growing company on its board. While the NYSE might have cost itself an opportunity, years later it continues to err on the side of exclusion (as does Nasdaq, only to a lesser extent). The bottom line? A shrewd company cares less about stature than it does about which exchange is the best fit.